CURRENCIES: Dollar Retreats After Release Of Trump Jr. Emails

Bank of Canada seen raising interest rates for first time in nearly 7 years Wednesday

The U.S. dollar weakened against major rivals on Tuesday, reversing earlier gains. The cause for the sudden weakness wasn't immediately clear but it came as Donald Trump, Jr., released emails in which he set up a meeting with a Russian-linked lawyer to obtain potentially damaging information on Hillary Clinton during the presidential campaign.

Continue Reading Below

The ICE Dollar Index , which measures the dollar against a basket of six currencies, was off by 0.3% at 95.71 late Tuesday after trading 0.1% higher in early New York trade.

"The market did not like Trump Jr's. email exchange, as there is some indication of collusion with the Russian government. It showed that there is a real chance there was a criminal activity in the Trump administration," said Boris Schlossberg, managing director of G-10 currency strategy at BK Asset Management.

Schlossberg noted, however, that the drop was relatively small and mostly computer-driven.

"We call this an algo pop or algo drop--the move was driven by algorithms and we saw some pairing of the selloff. It is difficult to see what the long-term ramifications of these emails will be. Fundamentally, tighter monetary policy should still drive the dollar higher over the longer term," Schlossberg said.

Earlier, the dollar hit a four-month high against Japan's yen. The dollar was 0.1% lower against the yen . It was buying Yen113.92 late Tuesday in New York, down from Yen114.04 late Monday. The yen traded as high as Yen114.48, a four-month high earlier, with investors adding to bets intended to exploit the divergence between rising government bond yields in the U.S. and Europe and low Japanese equivalent sovereign paper. The spread between 10-year U.S. Treasury yields and its Japanese counterpart was at its widest in two months. The yield spread between the 10-year Japanese bonds and their Treasury equivalent stands at 2.29 percentage points, hovering around its widest level since mid-May at 2.31 percentage points, according to FactSet data.

With rate differentials in play, central banks dominate the marquee for markets this week.

Looking ahead, the Fed Chairwoman Janet Yellen will give two days of testimony to lawmakers on Wednesday and Thursday that could shed further light on any shift in monetary policy, with her views on a slow policy unwind likely bolstered by a June payrolls reading that was tempered by tame wage inflation. (http://www.marketwatch.com/story/us-adds-222000-jobs-in-june-as-hiring-surges-2017-07-07)Fed officials have said they plan on lifting rates at least once more in 2017 and commencing a reduction of its bloated $4.5 trillion balance sheet, which could act as an additional tightening measure.

The Fed's moves also come as the Bank of Canada, which meets Wednesday, is widely expected to raise interest rates after strong signals in speeches for such action over the past month.

"A rate increase from the BOC would come as a number of the [Group of 7] central banks adopt a more hawkish stance, despite the economic data not necessarily supporting such a move." said Craig Erlam, senior analyst at Oanda.

The Canadian dollar dipped slightly against its U.S. counterpart, trading at C$1.2919 compared with C$1.2891 late Monday in New York. The loonie rallied on Friday to its highest level in 10 months, after better-than-expected job growth in Canada.

The strength of the Canadian dollar since early May--it's up more than 6% against its U.S. counterpart--has been driven by increasing expectations that the Bank of Canada will join the Fed as the second major central bank raising interest rates as the economy continues to expand rapidly.

Recently, the buck has buckled, compared with its rivals, as global central bankers have signaled a desire to end easy-money polices, which have pressured government-bonds prices--which move inversely to yields--and the greenback.

Also see:Is Janet Yellen still calling the tune in financial markets? (http://www.marketwatch.com/story/is-janet-yellen-still-calling-the-tune-in-financial-markets-2017-07-10)

In other currency pairs, the British pound reversed earlier gains against the dollar, and was 0.2% weaker, trading at $1.2855 late Tuesday compared with $1.2881 late Monday in New York.

The euro was 0.6% stronger, fetching $1.1468, compared with $1.1399 late Monday in New York.

Meanwhile, the New Zealand dollar was among the biggest losers, falling 0.9% against the U.S. dollar and trading at $0.7209, versus $0.7275 late Monday in New York. The currency sold off after data on consumer spending for June came in below estimates.